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Assessment of performance of public sector banks under camel framework


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2012 camel framework

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Assessment of performance of public sector banks under camel framework

  1. 1. CHAPTER-1 INTRODUCTION Today banks have a key role in all countries. And their policies and strategies affect economic development, employment, prices, national income, etc. The operations of banks are known as one of the most important economic activity in the world. Any activity which requires investments and financial resources undoubtedly requires the involvement of banks and financial institutions. Thus banks have the central role in economy. On the other hand, Managing of a country's financial system requires a variety of ways that enable financial institutions to identifying of management problems to be responsible for protecting the citizens and the entire system because existing problems due to poor management of bank, threaten the entire financial system of a country. Achieving to the components of a strong and efficient banking system, achieving goals, efficient use of resources and operating efficiently have been considered for many years so it requires assessment of bank's performance. Evaluation of bank performance is very important for Bankers due to the need to protect the banking operations against continuous risks or due to gambling-incentives related to capital market. In addition, there are numerous studies on financial interventions and its effect on efficiency of economic growth and also other studies on bank failures and its relationship with systemic crisis which demonstrate the important of performance evaluation. Today, the bank performance has become a favorite subject for many stakeholders such as customers, investors and the general public. There is a wide range of indicators of financial reports to evaluate financial performance. But the important criteria to determine the compatibility and health of a financial organization act as some mediators to measure profitability and liquidity of the organization. Among the various criteria; Basel Committee on Banking Supervision proposed the CAMEL component to investigate financial organizations in 1988. 1
  2. 2. CAMEL model is a simple and appropriate model for managerial and financial assessment of organizations. It is classified as a modern approach to evaluate the performance. However, this method has been used more in foreign countries but in our country little efforts has been done to introduce this model and some banks use it to measure their performance. But it is not used as a formal method which Central Bank introduces it. So there is still a need for further investigation in this field. In this study the CAMEL model was used to measure and compare the financial performance of public and private commercial banks of Qom city. For this purpose we measure the dimensions of the CAMEL model such as capital adequacy, asset quality, management quality, earning performance and liquidity. HISTORY OF CAMEL FRAMEWORK:CAMELS Rating Framework CAMEL model of rating was first developed in the 1970s by the three federal banking supervisors of the U.S (the Federal Reserve, the FDIC and the OCC) as part of the regulators‘ ―Uniform Financial Institutions Rating System‖, to provide a convenient summary of bank condition at the time of its on-site examination. The banks were judged on five different components under the acronym C-A-M-E-L: Capital adequacy, Asset quality, Management, Earnings and Liquidity. The banks received a score of ‗1‘ through ‗5‘ for each component of CAMEL and a final CAMEL rating representing the composite total of the component CAMEL scores as a measure of the bank‘s overall condition. The system of CAMEL was revised in 1996, when agencies added an additional parameter ‗S‘ for assessing ―sensitivity to market risk‖, thus making it ‗CAMELS‘ that is in vogue today. This system has applied by National Credit Union Administration (NCUA) in October 1987. Also Federal Reserve Bank of America assesses its banks on a scale of one to five by using the CAMEL model components which is monitoring various aspects of bank's health. The rank 1 is the highest rank (strongest performance) and rank 5 is 2
  3. 3. the lowest rank (weakest performance). Reliability, profitability and liquidity are the most important criteria for assessing the competency performance of a bank. Therefore, since 1988 the Basel Committee on Banking Supervision has stated that the CAMEL model is necessary to evaluate financial institution. In 1997 another component was added to the CAMEL model which was called market risk (S). However, Most of developing countries use CAMEL instead of CAMELS to evaluate the performance of financial organizations. It means they don't consider the market risk. Given that our country is a developing country so in this Study we used the CAMEL model. CAMELS‘ framework is a common approach to evaluate the financial health of the organization. This system was created by U.S. bank supervising organizations. Also the Asian Development Bank, African Development Bank, Central bank of America (the Federal Reserve Bank) and the World Bank use these parameters to evaluate the performance of financial organizations. In addition, the International Monetary Fund use compressed index of financial institutions to evaluate the accuracy of the financial systems of the members. Testing CAMELS system needs information from various sources such as balance sheet financing, financing sources, data macroeconomic, budget and cash flow forecasting, staffing and operation. In this model, the overall condition of the banks and their strengths and weaknesses are assessed. 3
  4. 4. CHAPTER-2 REVIEW OF LITERATURE In the process of continuous evaluation of the bank‘s financial performance both in public sector and private sector, the academicians, scholars and administrators have made several studies on the CAMEL model but in different perspectives and in different periods. Cole et al. (1995) conducted a study on ―A CAMEL Rating's Shelf Life‖ and their findings suggest that, if a bank has not been examined for more than two quarters, off-site monitoring systems usually provide a more accurate indication of survivability than its CAMEL rating. Godlewski (2003) tested the validity of the CAMEL rating typology for bank's default modification in emerging markets. He focused explicitly on using a logical model applied to a database of defaulted banks in emerging markets. Said and Saucier (2003) examined the liquidity, solvency and efficiency of Japanese Banks using CAMEL rating methodology, for a representative sample of Japanese banks for the period 1993- 1999, they evaluated capital adequacy, assets and management quality, earnings ability and liquidity position. Prasuna (2003) analyzed the performance of Indian banks by adopting the CAMEL Model. The performance of 65 banks was studied for the period 2003-04. The author concluded that the competition was tough and consumers benefited from better services quality, innovative products and better bargains. Dervizet al. (2008) investigated the determinants of the movements in the long term Standard & Poor‘s and CAMEL bank ratings in the Czech Republic during the period when the three biggest A Camel Model Analysis of Nationalized Banks in India 4
  5. 5. K.V.N.Prasad, G. Ravinder-25- banks, representing approximately 60% of the Czech banking sector's total assets, were privatized (i.e., the time span 1998-2001). Bhayani (2006) analyzed the performance of new private sector banks through the help of the CAMEL model. Four leading private sector banks – Industrial Credit & Investment Corporation of India, Housing Development Finance Corporation, Unit Trust of India and Industrial Development Bank of India - had been taken as a sample. Gupta and Kaur (2008) conducted the study with the main objective to assess the performance of Indian Private Sector Banks on the basis of Camel Model and gave rating to top five and bottom five banks. They ranked 20 old and 10 new private sector banks on the basis of CAMEL model. They considered the financial data for the period of five years i.e., from 2003-07. MIhir Dash (2009) ―A CAMEL analysis of the Indian Banking Industry‖ compares the performance of public sector banks with private/foreign banks under the CAMEL framework. He concluded that private/foreign banks fared better than public sector banks on most of the CANEL factors in the study period. 5
  6. 6. CHAPTER-3 THE INDUSTRY AND COMPANY PROFILE INTRODUCTION The banking section will navigate through all the aspects of the Banking System in India. It will discuss upon the matters with the birth of the banking concept in the country to new playersadding their names in the industry in coming few years.The banker of all banks, Reserve Bank of India (RBI), the Indian Banks Association (IBA) and top 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc. has been well defined under three separate heads with one page dedicated to each bank. However, in the introduction part of the entire banking cosmos, the past has been well explained under three different heads namely: History of Banking in India Nationalization of Banks in India Scheduled Commercial Banks in India The first deals with the history part since the dawn of banking system in India. Government took major step in the 1969 to put the banking sector into systems and it nationalised 14 private banks in the mentioned year. This has been elaborated in Nationalisation of Banks in India. The last but not the least explains about the scheduled and unscheduled banks in India. Section 42 (6)(a) of RBI Act 1934 lays down the condition of scheduled commercial banks. 6
  7. 7. History of Banking in India Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process.The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India.Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money have become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. 7
  8. 8. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. Phase I The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly European shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public had lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders. 8
  9. 9. Phase II Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1955: Nationalisation of State Bank of India. 1959: Nationalisation of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalisation of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalisation of seven banks with deposits over 200 crore. After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. 9
  10. 10. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. Phase III This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money.The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure. Scheduled Commercial Banks In India The commercial banking structure in India consists of: Scheduled Commercial Banks in India Unscheduled Banks in India Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks. 10
  11. 11. "Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank". "Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank". Organizational Structure of Banks in India: In India banks are classified in various categories according to differ rent criteria. The following charts indicate the banking structure Reserve Bank of India Commercial Banks Nationalized Agricultural Credit Private Urban Credit Co-operative Banks Short-term credit EXIM Development Banks Long-term credit Industrial Agricultural 11
  12. 12. Broad Classification of Banks in India: 1) The RBI: The RBI is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all scheduled banks and hence is known as the ―Reserve Bank‖. 2) Public Sector Banks:  State Bank of India and its Associates (8)  Nationalized Banks (19)  Regional Rural Banks Sponsored by Public Sector Banks (196) 3) Private Sector Banks:  Old Generation Private Banks (22)  Foreign New Generation Private Banks (8)  Banks in India (40) 4) Co-operative Sector Banks:  State Co-operative Banks  Central Co-operative Banks  Primary Agricultural Credit Societies  Land Development Banks  State Land Development Banks 5) Development Banks: Development Banks mostly provide long term finance for setting up industries. They also provide short-term finance (for export and import activities)  Industrial Finance Co-operation of India (IFCI)  Industrial Development of India (IDBI)  Industrial Investment Bank of India (IIBI)  Small Industries Development Bank of India (SIDBI)  National Bank for Agriculture and Rural Development (NABARD)  Export-Import Bank of India. 12
  13. 13. Role of Banks: Banks play a positive role in economic development of a country as repositories of community‘s savings and as purveyors of credit. Indian Banking has aided the economic development during the last fifty years in an effective way. The banking sector has shown a remarkable responsiveness to the needs of planned economy. It has brought about a considerable progress in its efforts at deposit mobilization and has taken a number of measures in the recent past for accelerating the rate of growth of deposits. As recourse to this, the commercial banks opened branches in urban, semiurban and rural areas and have introduced a number of attractive schemes to foster economic development. The activities of commercial banking have growth in multi-directional ways as well as multi-dimensional manner. Banks have been playing a catalytic role in area development, backward area development, extended assistance to rural development all along helping agriculture, industry, international trade in a significant manner. In a way, commercial banks have emerged as key financial agencies for rapid economic development. By pooling the savings together; banks can make available funds to specialized institutions which finance different sectors of the economy, needing capital for various purposes, risks and durations. By contributing to government securities, bonds and debentures of term-lending institutions in the fields of agriculture, industries and now housing, banks are also providing these institutions with an access to the common pool of savings mobilized by them, to that extent relieving them of the responsibility of directly approaching the saver. This intermediation role of banks is particularly important in the early stages of economic development and financial specification. A country like India, with different regions at different stages of development, presents an interesting spectrum of the evolving role of banks, in the matter of inter-mediation and beyond. 13
  14. 14. Mobilization of resources forms an integral part of the development process in India. In this process of mobilization, banks are at a great advantage, chiefly because of their network of branches in the country. And banks have to place considerable reliance on the mobilization of deposits from the public to finance development programmes. Further, deposit mobilization by banks in India acquired greater significance in their new role in economic development.Commercial banks provide short-term and medium-term financial assistance. The short-term credit facilities are granted for working capital requirements. The medium-term loans are for the acquisition of land, construction of factory premises and purchase of machinery and equipment. These loans are generally granted for periods ranging from five to seven years. They also establish letters of credit on behalf of their clients favoring suppliers of raw materials/machinery (both Indian and foreign) which extend the banker‘s assurance for payment and thus help their delivery. Certain transaction, particularly those in contracts of sale of Government Departments, may require guarantees being issued in lieu of security earnest money deposits for release of advance money, supply of raw materials for processing, full payment of bills on the assurance of the performance etc. Commercial banks issue such guarantees also. 14
  15. 15. PRODUCTS AND SERVICES OFFERED BY BANKS Investment Consumer Banking Commercial Banking Retail Products Banking Banking Private Banking Asset Management Pensions Mortgages Credit Cards Broad Classification of Products in a bank: The different products in a bank can be broadly classified into: Retail Banking. Trade Finance. Treasury Operations. Retail Banking and Trade finance operations are conducted at the branch level while the wholesale banking operations, which cover treasury operations, are at the hand office or a designated branch. Retail Banking: Deposits Loans, Cash Credit and Overdraft Negotiating for Loans and advances Remittances Book-Keeping (maintaining all accounting records) Receiving all kinds of bonds valuable for safe keepi 15
  16. 16. Trade Finance: Issuing and confirming of letter of credit. Drawing, accepting, discounting, buying, selling, collecting of bills of exchange, promissory notes, drafts, bill of lading and other securities. Treasury Operations: Buying and selling of bullion. Foreign exchange Acquiring, holding, underwriting and dealing in shares, debentures, etc. Purchasing and selling of bonds and securities on behalf of constituents. The banks can also act as an agent of the Government or local authority. They insure, guarantee, underwrite, participate in managing and carrying out issue of shares, debentures, etc. Apart from the above-mentioned functions of the bank, the bank provides a whole lot of other services like investment counseling for individuals, short-term funds management and portfolio management for individuals and companies. It undertakes the inward and outward remittances with reference to foreign exchange and collection of varied types for the Government. Following Services Can Be Availed On The Internet:  Bill Payment  Funds Transfer  Special Promotions & Offers  Ticket Booking  Online loans and credit cards  Online Shopping  Online Tax payment  Prepaid mobile recharge 16
  17. 17. Banks will expand In overseas market In order to sustain the business growth amid highly competitive market and slowing Indian economy, banks are likely to expand in the overseas market. They will try to tap emerging opportunities by expanding into newer markets such as Africa, former Soviet region and other South East Asian countries, in which India has maintained good trade relations. They can set up captive operations or expand through inorganic means by undergoing M&A (mergers and acquisitions) with banks in foreign countries. Passage of 'Banking Laws (Amendment) Bill' aimed at attracting more foreign investments With an aim to reform and strengthen India's banking sector, the LokSabha passed the 'Banking Amendment Bill' in Dec 2012. Once, the bill is passed by RajyaSabha as well, it will pave way for RBI to issue new banking licenses to private sector and attract more foreign investments in the sector. The Bill also proposes to enhance the voting rights of investors in case of both public sector and private sector banks from existing 1% to 10% of public sector banks and from 10% to 26% of private sector banks. This move will attract more foreign investment in the sector 17
  18. 18. MAJOR RECOMMENDATIONS ON BANKING SECTOR REFORMS: Strengthening Banking System Capital adequacy requirements should take into account market risks in addition to the Credit risks. In the next three years the entire portfolio of government securities should be marked to market and the schedule for the same announced at the earliest (since announced in the monetary and credit policy for the first half of 1998-99); government and other approved securities which are now subject to a zero risk weight, should have a 5 per cent weight for market risk. Risk weight on a government guaranteed advance should be the same as for other advances. This should be made prospective from the time the new prescription is put in place. Foreign exchange open credit limit risks should be integrated into the calculation of risk weighted assets and should carry a 100 per cent risk weight. Minimum capital to risk assets ratio (CRAR) be increased from the existing 8 per cent to 10 per cent; an intermediate minimum target of 9 per cent be achieved by 2000 and the ratio of 10 per cent by 2002; RBI to be empowered to raise this further for individual banks if the risk profile warrants such an increase. Individual banks' shortfalls in the CRAR are treated on the same line as adopted for reserve requirements, viz. uniformity across weak and strong banks. There should be penal provisions for banks that do not maintain CRAR. Public Sector Banks in a position to access the capital market at home or abroad be encouraged, as subscription to bank capital funds cannot be regarded as a priority claim on budgetary resources. 18
  19. 19. Systems and Methods in Banks There should be an independent loan review mechanism especially for large borrowal accounts and systems to identify potential NPAs. Banks may evolve a filtering mechanism by stipulating in-house prudential limits beyond which exposures on single/group borrowers are taken keeping in view their risk profile as revealed through credit rating and other relevant factors. Banks and FIs should have a system of recruiting skilled manpower from the open market. Public sector banks should be given flexibility to determined managerial remuneration levels taking into account market trends. There may be need to redefine the scope of external vigilance and investigation agencies with regard to banking business. There is need to develop information and control system in several areas like better tracking of spreads, costs and NPSs for higher profitability, , accurate and timely information for strategic decision to Identify and promote profitable products and customers, risk and asset-liability management; and efficient treasury management. BASEL II ACCORD Bank capital framework sponsored by the world's central banks designed to promote uniformity, make regulatory capital more risk sensitive, and promote enhanced risk management among large, internationally active banking organizations. The International Capital Accord, as it is called, will be fully effective by January 2008 for banks active in international markets. Other banks can choose to "opt in," or they can continue to follow the minimum capital guidelines in the original Basel Accord, finalized in 1988. The revised accord (Basel II) completely overhauls the 1988 Basel Accord and is based on three mutually supporting concepts, or "pillars," of capital adequacy. The first of these pillars is an explicitly defined regulatory capital requirement, a minimum capital-to-asset ratio equal to at least 8% of risk-weighted assets. Second, bank supervisory agencies, such as the Comptroller of the Currency, have authority to adjust 19
  20. 20. capital levels for individual banks above the 8% minimum when necessary. The third supporting pillar calls upon market discipline to supplement reviews by banking agencies. Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. The final version aims at: 1. ensuring that capital allocation is more risk sensitive; 2. Separating operational risk from credit risk, and quantifying both; 3. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic. Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place. The Accord in operation Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressingrisk), (2) supervisory review and (3) market discipline – to promote greater stability inthe financial system. 20
  21. 21. The Three Pillars of Basel II The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all. The First Pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are not considered fully quantifiable at this stage. The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach". For operational risk, there are three different approaches basic indicator approach or BIA, standardized approach or TSA, and advanced measurement approach or AMA. For market risk the preferred approach is VaR (value at risk). As the Basel 2 recommendations are phased in by the banking industry it will move from standardised requirements to more refined and specific requirements that have been developed for each risk category by each individual bank. The upside for banks that do develop their own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In future there will be closer links between the concepts of economic profit and regulatory capital. Credit Risk can be calculated by using one of three approaches 1. Standardized Approach 2. Foundation IRB (Internal Ratings Based) Approach 3. Advanced IRB Approach The standardized approach sets out specific risk weights for certain types of credit risk. The standard risk weight categories are used under Basel 1 and are 0% for short term government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and 100% weighting on commercial loans. A new 150% rating comes in for borrowers with poor credit ratings. The minimum capital requirement( the percentage of risk weighted assets to be held as capital) remains at 8%. For those Banks that decide 21
  22. 22. to adopt the standardized ratings approach they will be forced to rely on the ratings generated by external agencies. Certain Banks are developing the IRB approach as a result. The Second Pillar The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system. The Third Pillar The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately. The new Basel Accord has its foundation on three mutually reinforcing pillars that allow banks and bank supervisors to evaluate properly the various risks that banks face andrealign regulatory capital more closely with underlying risks. The first pillar is compatible with the credit risk, market risk and operational risk. The regulatory capital will be focused on these three risks. The second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it also casts responsibility on the supervisors to review and validate banks‘ risk measurement models. The third pillar on market discipline is used to leverage the influence that other market players can bring. This is aimed at improving the transparency in banks and improves reporting. 22
  23. 23. COMPANY PROFILE HISTORY: The origin of the State Bank of India goes back to the first decade of the nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later, the bank received its charter and was re-designed as the Bank of Bengal (2 January 1809). A unique institution, it was the first joint-stock bank of British India sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921. In 1951, when the First Five Year Plan was launched, the development of rural India was given the highest priority. The commercial banks of the country including the Imperial Bank of India had till then confined their operations to the urban sector and were not equipped to respond to the emergent needs of economic regeneration of the rural areas. In order, therefore, to serve the economy in general and the rural sector in particular, the All India Rural Credit Survey Committee recommended the creation of a state-partnered and state-sponsored bank by taking over the Imperial Bank of India, and integrating with it, the former state-owned or state-associate banks. An act was accordingly passed in Parliament in May 1955 and the State Bank of India was constituted on 1 July 1955. More than a quarter of the resources of the Indian banking system thus passed under the direct control of the State. Later, the State Bank of India (Subsidiary Banks) Act was passed in 1959, enabling the State Bank of India to take over eight former State-associated banks as its subsidiaries (later named Associates). 23
  24. 24. The State Bank of India was thus born with a new sense of social purpose aided by the 480 offices comprising branches, sub offices and three Local Head Offices inherited from the Imperial Bank. The concept of banking as mere repositories of the community's savings and lenders to creditworthy parties was soon to give way to the concept of purposeful banking subserving the growing and diversified financial needs of planned economic development. The State Bank of India was destined to act as the pacesetter in this respect and lead the Indian banking system into the exciting field of national development. VISION: My SBI, My Customer first, My SBI: First in customer satisfaction. MISSION: We will be prompt, polite and proactive with our customers. We will speak the language of young India. We will create products and services that help our customers achieve their goals. We will go beyond the call of duty to make our customers feel valued. We will be of service even in the remotest part of our country. We will offer excellence in services to those abroad as much as we do to those in India. We will imbibe state of the art technology to drive excellence. 24
  25. 25. CORPORATION BANK HISTORY: Nationalized in 1980, Corporation Bank was the forerunner when it came to evolving and adapting to the financial sector reforms. In 1997, it became the Second Public Sector Bank in the country to enter capital market, the IPO of which was oversubscribed by 13 times. the Bank has many " firsts " to its credit - Cash Management Services, Gold Banking, m-Commerce, " Online " approvals for Educational loans, 100% CBS Compliance and more recently, its pioneering efforts to take the technology to the rural masses in remotest villages through low-cost branchless banking - Business Correspondent model. All of which symbolize Bank's unswerved (constant) commitment to its customers to provide convenience banking. At Corporation Bank, what motivates us is the passion to excel in banking by maintaining highest standards of service to our customers, backed by innovative products and services which makes us one of the leading Public Sector Banks in the country, catering to a wide range of customers - from individuals to corporate clients. ―This is ‗Swadeshism‘ pure and simple and every lover of the country is expected to come forward and co-operate in achieving this end in view‖ In 1939, the Bank‘s name changed from Canara Banking Corporation (Udipi) Ltd., to ―Canara Banking Corporation Ltd.,‖ and strongly put forth its vision with the motto- ― SarveJanahSukhinoBhavantu” which means “Prosperity to All. ‖ The second change in the name of the Bank occurred in 1972, from ‗Canara Banking Corporation Ltd.‘ to ‗Corporation Bank Limited.‘ and finally ‗Corporation Bank‘ following its nationalization on 15th April, 1980. 25
  26. 26. A Big Leap to the Big League: As on 30th September 2013, the Total Business of the Bank was Rs.2,94,477crore. The Total Deposit stood at Rs.1,73,410crore and the Total Advances were at Rs.1,21,067 crore. The Networth rose to Rs.9,959crore. Growing Bigger. Getting Closer: Presently, the Bank has a network of 1775 fully automated CBS branches, 1753 ATMs and 3574 Branchless Banking Units across the country. The Bank has Representative Offices at Dubai and at Hong Kong. Corporate Vision: ―The Most Preferred Bank with Global Standards‖ Corporate Mission : To become a provider of World - Class Financial Services, To meet Customer expectations through Innovation and Technological Initiatives To maintain leadership in inclusive banking To enhance stakeholders' value To fulfill national and social obligations To create an environment, intellectually satisfying and professionally rewarding to the employees To emerge as a role model for ethical values and Good Corporate Governance "The Primary object in forming ‗Corporation‘ is not only to cultivate habits of thrift amongst all classes of people, without distinction of caste or creed, but also habits of co-operation amongst all classes‖. 26
  27. 27. PUNJAB AND SIND HISTORY It was in the year 1908, when a humble idea to uplift the poorest of poor of the land culminated in the birth of Punjab & Sind Bank with the far-sighted vision of luminaries like BhaiVir Singh, Sir Sunder Singh Majitha and SardarTarlochan Singh. They enjoyed the highest respect with the people of Punjab. The bank was founded on the principle of social commitment to help the weaker section of the society in their economic endeavours to raise their standard of life. Decades have gone by, even today Punjab & Sind Bank stands committed to honor the social commitments of the founding fathers. Punjab & Sind Bank (P&SB) is a major Public Sector bank in Northern India and working 100% on CBS platform. The banks government shareholding is 79.86%. Of its 1200 branches and offices spread throughout India, almost 485 are in Punjab state. The bank's corporate headquarters is in New Delhi. Its net profit is 339.22 crores and net NPA is 2.14% for the year ending 2012-13. The banks net profit for the quarter ending June 2013 is 121.71 crores. Total business of the bank is 1,22,485 crores. Business per employee is 14.35 crore& business per branch is 108.49 crores. Bank has registered a tremendous growth rate in Housing, Auto & Retail loan scheme. Under DBT (Direct Benefit Scheme) bank had opened 81,204 accounts in 43 districts. The bank has recently started two variants of Rupay cards- Rupay debit card and RupayKissan credit cards. After fully CBS environment, bank has been continiously launching differentdifferent products. Today, Punjab & Sind Bank providing Internet banking, Mobile banking, tele banking and sms alert facility to his customers and giving highest rate of interest on fixed deposits for senior citizens.Punjab & Sind Bank also providing a variety 27
  28. 28. of saving accounts like Basic saving account for students, pension saving account for pensioners, saving general accounts and saving premier account. In current account, the bank providing two types account- current account general and current account premier. Recently, the bank has opened a HUB in Chandigarh city for housing loan proposals. Its tag line is "Where service is a way of life". 28
  29. 29. CHAPTER-4 RESEARCH METHODOLOGY OBJECTIVE OF THE STUDY:- To study the strength of using CAMELS framework as a tool of Performance evaluation for public sector banks To describe the CAMELS model of ranking banking institutions, so as to analyze the performance of 3 Public sectors bank- STATE BANK OF INDIA, CORPORATION BANK, PUNJAB AND SIND BANK Data Collection  Secondary Data: Secondary data on the subject was collected from journals, website and other references. RESEARCH METHODOLOGY: As long as the methodology is concerned, I have made use of a framework called CAMELS FRAMEWORK. There are so many models of evaluating the performance of the banks, but I have chosen the CAMELS Model for this purpose. I have gone through several books, journals and websites and found it the best model because it measures the performance of the banks from each parameter i.e. Capital, Assets, Management, Earnings, Liquidity and Sensitivity to Market risks. CAMELS evaluate banks on the following six parameters:- CAPITAL ADEQUACY: It is important for a bank to maintain depositors‘ confidence and preventing the bank from going bankrupt. It reflects the overall financial condition of banks and also the ability of management to meet the need of additional capital. The following ratios measure capital adequacy: 29
  30. 30. Capital Adequacy Ratio (CAR): The capital adequacy ratio is developed to ensure that banks can absorb a reasonable level of losses occurred due to operational losses and determine the capacity of the bank in meeting the losses. As per the latest RBI norms, the banks should have a CAR of 9 per cent. Debt-Equity Ratio (D/E): This ratio indicates the degree of leverage of a bank. It indicates how much of the bank business is financed through debt and how much through equity. Advance to Assets Ratio (Adv/Ast): This is the ratio indicates a bank‘s aggressiveness in lending which ultimately results in better profitability. Government Securities to Total Investments (G-sec/Inv): It is an important indicator showing the risk-taking ability of the bank. It is a bank‘s strategy to have high profits, high risk or low profits, low risk. ASSET QUALITY (GNPA): The quality of assets is an important parameter to gauge the strength of bank. The prime motto behind measuring the assets quality is to ascertain the component of nonperforming assets as a percentage of the total assets. The ratios necessary to assess the assets quality are: Net NPAs to Total Assets (NNPAs/TA): This ratio discloses the efficiency of bank in assessing the credit risk and, to an extent, recovering the debts. Net NPAs to Net Advances (NNPAs/NA): It is the most standard measure of assets quality measuring the net non-performing assets as a percentage to net advances. Total Investments to Total Assets (TI/TA): It indicates the extent of deployment of assets in investment as against advances. Percentage Change in NPAs: This measure tracks the movement in Net NPAs over previous year. The higher the reduction in the Net NPA level, the better it for the bank 30
  31. 31. MANAGEMENT SOUNDNESS (MGNT): Management efficiency is another important element of the CAMEL Model. The ratio in this segment involves subjective analysis to measure the efficiency and effectiveness of management. The ratios used to evaluate management efficiency are described as: Total Advances to Total Deposits (TA/TD): This ratio measures the efficiency and ability of the bank‘s management in converting the deposits available with the bank excluding other funds like equity capital, etc. into high earning advances. Profit per Employee (PPE): This shows the surplus earned per employee. It is known by dividing the profit after tax earned by the bank by the total number of employees. Business per Employee (BPE): Business per employee shows the productivity of human force of bank. It is used as a tool to measure the efficiency of employees of a bank in generating business for the bank. Return on Net worth (RONW): It is a measure of the profitability of a bank. Here, PAT is expressed as a percentage of Average Net Worth. EARNINGS & PROFITABILITY (ROA): The quality of earnings is a very important criterion that determines the ability of a bank to earn consistently. It basically determines the profitability of bank and explains its sustainability and growth in earnings in future. The following ratios explain the quality of income generation. Operating Profit to Average Working Funds (OP/AWF): This ratio indicates how much a bank can earn profit from its operations for every rupee spent in the form of working fund. Percentage Growth in Net Profit (PAT Growth): It is the percentage change in net profit over the previous year. Net Profit to Average Assets (PAT/AA): This ratio measures return on assets employed or the efficiency in utilization of assets. 31
  32. 32. LIQUIDITY (LQD):Risk of liquidity is curse to the image of bank. Bank has to take a proper care to hedge the liquidity risk; at the same time ensuring good percentage of funds are invested in high return generating securities, so that it is in a position to generate profit with provision liquidity to the depositors. The following ratios are used to measure the liquidity: Liquid Assets to Demand Deposits (LA/DD): This ratio measures the ability of bank to meet the demand from depositors in a particular year. To offer higher liquidity for them, bank has to invest these funds in highly liquid form. Liquid Assets to Total Deposits (LA/TD): This ratio measures the liquidity available to the total deposits of the bank. Liquid Assets to Total Assets (LA/TA): It measures the overall liquidity position of the bank. The liquid asset includes cash in hand, balance with institutions and money at call and short notice. The total assets include the revaluation of all the assets. G-Sec to Total Assets (G-Sec/TA): It measures the risk involved in the assets. This ratio measures the Government securities as proportionate to total assets. Approved Securities to Total Assets (AS/TA): This is arrived by dividing the total amount invested in Approved securities by Total Assets. SENSITIVITY - SENSITIVITY TO MARKET RISK, ESPECIALLY INTEREST RATE RISK Sensitivity to market risk, the "S" in CAMELS is a complex and evolving measurement area. It was added in 1995 by Federal Reserve and the OCC primarily to address interest rate risk, the sensitivity of all loans and deposits to relatively abrupt and unexpected shifts in interest rates. In 1995 they were also interested in banks‘ lending to farmers, and the sensitivity of farmer‘s ability to make loan repayments as specific crop prices fluctuate. Unlike classic ratio analysis, which most of CAMELS system was based on, which relies on relatively certain, historical, audited financial statements, this forward look approach involved examining various hypothetical future price and rate 32
  33. 33. scenarios and then modeling their effects. The variability in the approach is significant. In June 1996 a Joint Agency Policy Statement was issued by the OCC, Treasury, Fed and FDIC defining interest rate risk as the exposure of a bank‘s financial condition to adverse movements in interest rates resulting from the following: Repricing or maturity mismatch risk - differences in the maturity or timing of coupon adjustments of bank assets, liabilities and off-balance-sheet instruments Yield curve risk - changes in the slope of the yield curve Basis risk - imperfect correlations in the adjustment of rates earned and paid on different instruments with otherwise similar repricing characteristics (e.g. 3 month Treasury bill versus 3 month LIBOR) Option risk - interest rate related options embedded in bank products The CAMELS system failed to provide early detection and prevention of the devastating financial crisis of 2007–2008. Informed and motivated by the large bank failures, and the horrific ensuing crisis, in June 2009 the FDIC announced a significantly expanded Forward-Looking Supervision approach, and provided extensive training to its front line bank examiners. These are the employees of the Division of Supervision and Consumer Protection (DSC) who visit the banks, apply the official guidelines to practical situations, make assessments, and assign the CAMELS ratings on behalf of the FDIC. Since FDIC is a limited insurance pool they are highly concerned with any rise in bank failure rates. In the same timeframe various other regulators began official stress testing of large banks, with the results often publicly disclosed. SeeStress test (financial), List of bank stress tests, List of systemically important banks.Sensitivity to market risk can cover ever increasing territory. What began as an assessment of interest rate and farm commodity price risk exposures has grown exponentially over time. Forward-looking Supervision and sensitivity to market risk can include:  Assessing, monitoring, and management of any credit concentrations, for example lending to specific groups such as: established commercial real estate lending, or lending for acquisition, development, and construction 33
  34. 34. agricultural lending energy sector lending medical lending credit card lending  Exposure to market based price changes, including: foreign exchange commodities equities derivatives, including interest rate, credit default and other types of swaps LIMITATIONS OF THE STUDY: The study was limited to three banks. Time and resource constrains. The method discussed pertains only to banks though it can be used for performance evaluation of other financial institutions. The study was completely done on the basis of ratios calculated from the balancesheets. It has not been possible to get a personal interview with the top management employees of all banks under study. 34
  35. 35. CHAPTER-5 DATA ANALYSIS AND PRESENTATION Now each parameter will be taken separately & discussed in detail. (A)CAPITAL ADEQUACY: In accordance with Basel III norms, Indian banks will have to maintain their capital adequacy ratio at nine percent as against the minimum recommended requirement of eight per cent.A measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. Also known as "Capital to Risk Weighted Assets Ratio (CRAR) 35
  36. 36. THE CAPITAL ADEQUACY RATIO FOR 3 PUBLIC SECTOR BANKS IN INDIA Particular 2010 2011 2012 2013 State bank of India 13.39% 13.25% 13.16% 11.85% Corporation bank 15.37% 14.11% 13.12% 12.33% Punjab and Sind bank 13.10% 12.94% 13.26% 12.91% INTERPRETATION:Reserve Bank of India prescribes Banks to maintain a minimum Capital to riskweighted Assets Ratio (CRAR) of 9 percent with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 percent prescribed in Basel Documents. This ratio is propounded to ensure that banks can adopt a reasonable level of losses arising from operations and to ascertain bank‘s loss bearing capacity. Higher the ratio means banks are stronger and the investors are more protected. Latest RBI guideline for banks in India is to maintain a CRAR of 9%. Therefore ranking for CRAR is I- Corporation bank, II – Punjab National Bank, III – State Bank Of India. The overall percentage for these banks are State Bank Of India- 12.91, Corporation Bank – 13.73 , Punjab And Sind bank – 13.05. 36
  37. 37. (B)ASSET QUALITY: Net NPAs to Total Assets (NNPAs/TA): Particular 2010 2011 2012 2013 STATE BANK OFINDIA .531 .653 1.015 1.217 CORPORATION BANK .177 .277 .779 .729 PUNJAB AND SIND BANK .205 .345 .751 .137 INTERPRETATION: This ratio indicates the efficiency of bank in ascertaining the risk arising from credit andrecovering the debts. Under this ratio, the net NPAs are expressed as a percentage of totalassets. Lower the ratio reflects the better is the quality of advances and vice versa. In this the rating shall be as I – Corporation Bank, II – Punjab national Bank, III – State Bank of India. 37
  38. 38. MANAGEMENT SOUNDNESS (MGNT) : Total Advances to Total Deposits (TA/TD): Particular 2010 2011 2012 2013 STATE BANK OFINDIA .785 .824 .831 .869 CORPORATION BANK .573 .743 .737 .715 PUNJAB AND SIND BANK .664 .713 .731 .728 INTERPRETATION: This ratio assesses the efficiency of the bank‘s management in applying the deposits(including receivables) available excluding other funds like equity capital, etc. intoadvances with high yields. Savings deposits, demand deposits, term deposits and deposits of other banks are included in total deposits. Ranking shall be as I – State Bank Of India, II – Punjab and Sind bank. EARNINGS & PROFITABILITY (ROA): Net Profit to Average Assets (PAT/AA): Particular 2010 2011 2012 2013 STATE BANK OFINDIA .005 .009 .008 .007 CORPORATION BANK .012 .011 .009 .008 PUNJAB AND SIND BANK 1.044 .840 .638 .442 INTERPRETATION: This ratio reflects the return on assets employed. It is calculated by dividing the net Profits with Average assets of the bank. Higher the ratio reflects better earning potential and vice versa. In this rating shall be as I – Corporation bank, II – Punjab And Sind Bank, III – State Bank of India. 38
  39. 39. LIQUIDITY (LQD) : Liquid Assets to Demand Deposits (LA/DD): Particular 2010 2011 2012 2013 STATE BANK OFINDIA .0391 .0327 .0618 .0667 CORPORATION BANK .009 .007 .007 .010 PUNJAB AND SIND BANK .183 .769 .835 .179 INTERPRETATION: This ratio reflects the ability of bank to honor the demand from depositors during a particular year. In order to provide higher liquidity for depositors, bank has to invest these funds in highly liquid form. OVERALL RATING: Bank C A M E L MEAN RANK STATE BANK OFINDIA 12.91 0.854 8.275 .007 .138 4.438 I CORPORATION BANK 13.73 0.491 6.92 .037 .008 4.237 III SIND 13.05 0.704 7.09 .741 .492 4.415 II PUNJAB AND BANK Overall rating of CAMEL shows the good performance as Good (Up to 8.40). 39
  40. 40. CHAPTER-6 SUMMARY AND CONCLUSION SUMMARY: CAMEL model is important tool to assess the relative financial strength of a bank and tosuggest suitable measures to improve its weaknesses. In the present study CAMEL ranking approach is used to assess relative performance of Indian public sector banks. The study observed that there is significant difference between the mean values ofCAMEL ratios of 3 public sector banks. It is found that during the year 2010 TO 2013 Capital adequacy and Earnings quality of Corporation Bank and Punjab And Sind bank was more than State Bank Of India while Assets quality, Management Efficiency of SBI is more than the Corporation Bank and Punjab and Sind bank whereas Liquidity position of corporation bank was far better than SBI and P&S bank. Similarly State Bank of India should take necessary steps to improve its liquidity position and Capital adequacy. The present study does not relate to Private Sector Banks and Foreign Banks. SBI: The Capital Adequacy Ratio SBI Bank stands at 12.92%, against RBI stipulation of 9%, with Tier1 capital at 9.49% and Tier II at 3.43%. The CAR remains strong and the strength comes from the following three factors: Robust internal generation and plough back of profits of Rs.10,890 crores; Capital infusion of Rs.3004 crores by the Government; and Continuous and on-going efforts at optimizing capital The deterioration has occurred in the mid-corporate space in sectors under stress in the economy namely Paper and Plastics, Iron and Steel, Textiles, Engineering Goods, Transport, etc. Gross NPAs are currently at 4.75% with Net NPA level of 2.10% During the year the Reserve Bank of India reduced Cash Reserve Ratio by 0.75% and Statutory Liquidity Ratio by 1%. The Bank therefore had ample liquidity during the year.The Bank also used Mutual fund schemes for liquidity management and higher returns. The Bank made a profit of about Rs. 600 Crores from Equity and Mutual Funds. 40
  41. 41. CORPORATION BANK: Therehave also been concerns on asset quality across the banking industry because of the indirect impact of trade and demand slowdown and higher interest rates on repayment capacity of the clients.The Bank‘s CRAR under Basel II stood at a comfortable level of12.33% despite offering high interest rates, banks were not able to mobilize the desired funds through deposits, creating pressure on liquidity. There have also been concerns on asset quality across the banking industry because of the indirect impact of trade and demand slowdown and higher interest rates on repayment capacity of the clients. PUNJAB AND SIND BANK: Based on Basel II norms, the Bank has adopted Standardized Approach forCredit Risk, Modified Duration approach for Market Risk and Basic Indicator approach for Operational Risk for computing the capital charge.Bank has geared up to maintain time schedule for moving towardsadvanced approaches under BASEL II as suggested by RBI. The performance of the Bank under recovery of NPAs during the year continued to be good. The aggressive and focused efforts could result in the total recovery of over Rs.529.01 Crore including recovery of Rs.202.93 Crore in Technically Written Off accounts. The performance of the Bank under recovery of NPAs during the year continued to be good. The Liquidity Management Framework is well established, which safeguards the ability of the Bank to meet all payment obligations when they come due. It is designed to identify measure and manage the liquidity risk position of the Bank. 41
  42. 42. CONCLUSION: Capital adequacy ultimately determines how well financial institutions can cope with shocks to their balance sheets. Thus, it is useful to track capital-adequacy ratios that take into account the most important financial risks—foreign exchange, credit, and interest rate risks—by assigning risk weightings to the institution‘s assets. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. With this backdrop, the asset quality is gauged in relation to the level and severity of non-performing assets, adequacy of provisions, recoveries, distribution of assets etc. Popular indicators include nonperforming loans to advances, loan default to total advances, and recoveries to loan default ratios. The solvency of financial institutions typically is at risk when their assets become impaired, so it is important to monitor indicators of the quality of their assets in terms of overexposure to specific risks, trends in nonperforming loans, and the health and profitability of bank borrowers— especially the corporate sector. Share of bank assets in the aggregate financial sector assets: In most emerging markets, banking sector assets comprise well over 80 per cent of total financial sector assets, whereas these figures are much lower in the developed economies. However, the dominant role of banks in financial intermediation in emerging economies and particularly in India will continue in the medium-term; and the banks will continue to be ―special‖ for a long time. In this regard, it is useful to emphasise the dominance of banks in the developing countries in promoting non-bank financial intermediaries and services including in development of debt-markets. Even where role of banks is apparently diminishing in emerging markets, substantively, they continue to play a leading role in non-banking financing activities, including the development of financial markets. Sound management is one of the most important factors behind financial institutions‘ performance. 42
  43. 43. Indicators of quality of management, however, are primarily applicable to individual institutions, and cannot be easily aggregated across the sector. Furthermore, given the qualitative nature of management, it is difficult to judge its soundness just by looking at financial accounts of the banks. It is primarily a qualitative factor applicable to individual institutions. Several indicators, however, can jointly serve—as, for instance, efficiency measures do—as an indicator of management soundness. Strong earnings and profitability profile of banks reflects the ability to support present and future operations. More specifically, this determines the capacity to absorb losses, finance its expansion, pay dividends to its shareholders, and build up an adequate level of capital. An adequate liquidity position refers to a situation, where institution can obtain sufficient funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost. It is, therefore, generally assessed in terms of overall assets and liability management, as mismatching gives rise to liquidity risk. 43
  44. 44. CHAPTER-7 SUGGESTIONS OR RECOMMENDATIONS RECOMMENDATIONS: The banks should adapt themselves quickly to the changing norms. The system is getting internationally standardized with the coming of BASELL II accords so the Indian banks should strengthen internal processes so as to cope with the standards. The banks should maintain a 0% NPA by always lending and investing or creating quality assets which earn returns by way of interest and profits. The banks should find more avenues to hedge risks as the market is very sensitive to risk of any type. Have good appraisal skills, system, and proper follow up to ensure that banks are abovethe risk. SUGGESTIONS: Research on 3 PUBLIC SECTOR are best suited for the use of the CAMELS Framework Research on how other variables can be added or how variables can be selected to suit the industry needs. 44
  45. 45. BIBLIOGRAPHY Websites Visited CB BI World Journal of Social SciencesVol.3. No. 3. May 2013 Issue. Pp. 71 – 88 45
  46. 46. APPENDIX Consolidated Balance Sheet of ------------------- in Rs. Cr. ------------------State Bank of India Mar '13 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths 12 mths 684.03 671.04 635.00 634.88 634.88 684.03 671.04 635.00 634.88 634.88 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Init. Contribution Settler Preference Share 46
  47. 47. Application Money Employee 0.00 0.00 0.00 0.00 0.00 124,348.99 105,558.97 82,836.25 82,500.70 71,755.51 0.00 0.00 0.00 0.00 0.00 Net Worth 125,033.02 106,230.01 83,471.25 83,135.58 72,390.39 Deposits 1,627,402.61 1,414,689.40 1,255,562.48 1,116,464.56 1,011,988.33 Borrowings 203,723.20 Total Debt 1,831,125.81 1,572,680.76 1,398,033.25 1,238,539.13 1,076,579.97 Stock Opiton Reserves Revaluation Reserves Minority 157,991.36 142,470.77 122,074.57 64,591.64 4,253.86 3,725.67 2,977.17 2,631.27 2,228.27 0.00 0.00 0.00 0.00 0.00 Joint 0.00 0.00 0.00 0.00 0.00 146,994.36 163,294.96 125,837.97 153,627.10 Interest Policy Holders Funds Group Share in Venture Other Liabilities & 172,745.65 Provisions Total Liabilities 2,133,158.34 1,829,630.80 1,647,776.63 1,450,143.95 1,304,825.73 47
  48. 48. Mar '13 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths 12 mths 79,199.21 119,349.83 82,195.58 74,161.07 48,391.62 35,977.62 39,653.42 51,100.63 Assets Cash & Balances with 89,574.03 RBI Balance with Banks, Money 55,653.70 at Call Advances 1,392,608.03 1,163,670.21 1,006,401.55 869,501.64 750,362.38 Investments 519,393.19 460,949.14 419,066.45 402,754.13 372,231.45 Gross Block 9,369.93 19,619.76 17,543.26 15,886.95 14,063.96 0.00 12,593.09 11,402.13 10,359.09 9,127.29 9,369.93 7,026.67 6,141.13 5,527.86 4,936.67 0.00 381.30 345.70 486.03 286.81 69,803.58 60,615.96 50,025.30 51,746.73 0.00 0.00 0.00 0.00 Accumulated Depreciation Net Block Capital Work In Progress Other Assets 66,559.46 Minority Interest 0.00 48
  49. 49. Group Share in Joint 0.00 0.00 0.00 0.00 0.00 Venture Total Assets 2,133,158.34 1,829,421.73 1,647,898.24 1,450,143.96 1,304,825.74 Contingent 906,599.60 Liabilities Bills for collection Book Value (Rs) 776,754.01 687,540.57 556,675.30 734,943.70 230,090.67 240,811.53 234,065.24 197,108.13 175,677.61 1,827.89 1,583.05 1,314.51 1,309.46 1,140.22 Consolidated Profit & Loss account of State ------------------- in Rs. Cr. ------------------Bank of India Mar '13 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths 12 mths Income Interest Earned 167,978.14 147,197.39 113,636.44 100,080.73 91,667.02 49
  50. 50. Other Income 32,581.69 31,205.10 34,342.60 30,748.11 22,055.34 Total Income 200,559.83 178,402.49 147,979.04 130,828.84 113,722.36 Expenditure Interest expended 106,817.91 89,319.55 68,086.40 66,637.51 62,626.47 Employee Cost 24,401.09 22,084.03 19,979.58 16,331.06 12,997.19 Selling and Admin Depreciation Miscellaneous 0.00 19,756.75 16,046.14 10,675.76 7,311.30 1,577.49 Expenses 1,371.61 1,380.55 1,321.56 924.46 49,440.35 29,884.38 31,288.22 23,842.40 18,684.03 Expenses Preoperative 0.00 ExpCapitalised Operating Expenses Provisions 0.00 0.00 0.00 0.00 52,819.80 60,883.26 57,369.79 48,637.25 30,182.18 & Contingencies Total Expenses 22,599.13 12,213.51 11,324.70 3,533.53 9,734.80 182,236.84 162,416.32 136,780.89 118,808.29 102,543.45 Mar '13 Year Profit for the Mar '11 Mar '10 Mar '09 12 mths Net Mar '12 12 mths 12 mths 12 mths 12 mths 18,322.99 15,986.16 11,198.16 12,020.54 11,178.90 50
  51. 51. Minority Interest Share Of 638.44 P/L Of Associates 630.21 494.99 279.81 217.78 -231.68 0.00 0.00 0.00 0.00 Net P/L After Minority Interest & Share Of 17,916.23 15,355.95 10,703.17 11,740.73 10,961.12 Associates Extraordionary Items 0.00 0.00 0.00 0.00 0.00 Profit brought forward 892.74 522.92 58.58 216.00 87.74 Total 19,215.73 16,509.08 11,256.74 12,236.54 11,266.64 Preference Dividend 0.00 0.00 0.00 0.00 0.00 Equity Dividend 3,319.46 2,348.66 1,905.00 1,904.65 1,841.15 0.00 388.46 353.55 321.51 309.66 267.87 238.23 176.35 189.33 176.08 Equity Dividend (%) 0.00 0.00 0.00 0.00 0.00 Book Value (Rs) 1,827.89 1,583.05 1,314.51 1,309.46 1,140.22 Transfer to Statutory 14,066.97 12,236.16 7,962.06 9,665.09 8,676.22 Corporate Dividend Tax Per share data (annualised) Earning Per Share (Rs) Appropriations 51
  52. 52. Reserves Transfer to Other Reserves 0.00 0.00 0.00 0.00 0.00 2,737.12 2,258.55 2,226.16 2,150.81 892.74 522.92 58.58 216.00 Proposed Dividend/Transfer to 3,319.46 Govt Balance c/f to Balance Sheet Total 1,422.54 18,808.97 15,866.02 10,743.53 11,949.83 11,043.03 52
  53. 53. Consolidated Balance Sheet of ------------------- in Rs. Cr. ------------------Corporation Bank Mar '13 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths 12 mths Total Share Capital 152.91 148.13 148.13 143.44 143.44 Equity Share Capital 152.91 148.13 148.13 143.44 143.44 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Employee Stock Opiton 0.00 0.00 0.00 0.00 0.00 Reserves 9,449.60 8,197.00 7,053.38 5,688.31 4,798.86 Revaluation Reserves 0.00 0.00 0.00 0.00 0.00 Net Worth 9,602.51 8,345.13 7,201.51 5,831.75 4,942.30 Capital and Liabilities: Share Application Money 0.00 Preference Share Capital Init. Contribution Settler Preference Share Application Money 53
  54. 54. Deposits 165,998.45 136,134.81 116,739.11 92,719.10 73,926.55 Borrowings 12,898.85 14,248.10 15,965.38 9,077.53 Total Debt 178,897.30 150,382.91 132,704.49 101,796.63 75,998.95 Minority Interest 0.00 0.00 0.00 0.00 0.00 Policy Holders Funds 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4,971.19 4,554.91 3,412.27 3,809.68 5,852.86 Group Share in Joint Venture Other Liabilities & Provisions Total Liabilities 2,072.40 193,471.00 163,282.95 143,318.27 111,438.06 86,794.11 Mar '13 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths 12 mths 8,847.85 9,288.24 8,142.32 8,835.03 5,590.60 3,835.48 2,409.76 2,250.19 1,956.89 4,949.09 Assets Cash & Balances with RBI Balance with Money at Call Banks, Advances 118,716.65 100,469.02 86,850.40 63,202.56 48,512.16 Investments 58,184.94 47,529.43 43,497.01 34,551.93 24,914.69 54
  55. 55. Gross Block 439.89 997.31 906.53 817.43 778.37 0.00 641.81 578.47 526.51 477.81 439.89 355.50 328.06 290.92 300.56 Capital Work In Progress 3.34 2.09 4.59 0.00 0.00 Other Assets 3,442.87 3,570.01 2,493.44 2,869.85 2,625.49 Minority Interest 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Accumulated Depreciation Net Block Group Share in Joint Venture Total Assets 193,471.02 163,624.05 143,566.01 111,707.18 86,892.59 Contingent Liabilities 57,689.94 38,333.14 37,662.79 34,033.38 36,355.20 Bills for collection 0.00 19,082.59 15,758.12 10,666.54 9,146.68 Book Value (Rs) 627.97 563.37 486.15 406.56 344.56 55
  56. 56. Consolidated Profit & Loss ------------------- in Rs. Cr. ------------------account of Corporation Bank Mar '13 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths 12 mths Income Interest Earned 15,334.08 13,017.78 9,135.04 7,294.60 6,067.34 Other Income 1,619.93 1,506.50 1,194.69 1,110.48 Total Income 16,954.01 14,524.28 10,262.07 8,489.29 7,177.82 1,127.03 Expenditure Interest expended 11,906.44 9,870.57 6,194.86 5,083.23 4,371.02 Employee Cost 990.54 913.44 895.10 631.80 468.06 Selling and Admin Expenses 0.00 349.39 304.55 258.12 223.36 Depreciation 96.63 79.81 69.28 65.95 55.13 Miscellaneous Expenses 2,517.17 1,792.96 1,585.16 1,268.96 1,160.82 Preoperative ExpCapitalised 0.00 0.00 0.00 0.00 0.00 56
  57. 57. Operating Expenses 1,997.21 1,783.93 1,642.01 1,260.15 1,001.90 Provisions & Contingencies 1,607.13 1,351.67 1,212.08 964.68 Total Expenses 15,510.78 13,006.17 9,048.95 7,308.06 6,278.39 Mar '13 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths 12 mths 905.47 Net Profit for the Year 1,443.24 1,518.11 1,213.12 1,181.24 899.44 Minority Interest 0.00 0.00 0.00 0.00 0.00 Share Of P/L Of Associates 0.00 -0.27 -0.06 -0.11 -0.88 1,443.24 1,518.39 1,213.17 1,181.35 900.32 Extraordionary Items 0.00 0.00 206.95 0.00 0.00 Profit brought forward 0.00 0.00 0.00 0.00 0.00 Total 1,443.24 1,518.11 1,420.07 1,181.24 899.44 Preference Dividend 0.00 0.00 0.00 0.00 0.00 Equity Dividend 290.54 309.29 296.27 236.67 184.30 Corporate Dividend Tax 43.37 50.17 48.06 40.22 31.32 94.38 102.49 81.89 82.35 62.71 Net P/L After Minority Interest & Share Of Associates Per share data (annualised) Earning Per Share (Rs) 57
  58. 58. Equity Dividend (%) 0.00 0.00 0.00 0.00 0.00 Book Value (Rs) 627.97 563.37 486.15 406.56 344.56 Transfer to Statutory Reserves 760.64 828.37 484.05 663.23 682.59 Transfer to Other Reserves 340.12 324.75 584.89 230.13 1.01 333.91 359.46 344.33 276.89 215.62 Balance c/f to Balance Sheet 8.57 5.81 6.85 11.10 1.11 Total 1,443.24 1,518.39 1,420.12 1,181.35 900.33 Appropriations Proposed Dividend/Transfer to Govt 58
  59. 59. Balance Sheet of Punjab & Sind ------------------- in Rs. Cr. ------------------Bank Mar '13 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths 12 mths Total Share Capital 454.02 434.21 423.06 383.06 383.06 Equity Share Capital 254.02 234.21 223.06 183.06 183.06 Share Application Money 0.00 0.00 0.00 0.00 0.00 Preference Share Capital 200.00 200.00 200.00 200.00 200.00 Reserves 4,150.08 3,085.23 2,626.36 2,232.55 1,234.09 Revaluation Reserves 0.00 Net Worth 4,604.10 4,248.95 3,803.39 2,615.61 1,617.15 Deposits 70,641.50 63,123.98 59,723.19 49,155.09 34,675.65 Borrowings 2,540.05 3,382.33 2,885.89 3,701.05 3,606.48 Total Debt 73,181.55 66,506.31 62,609.08 52,856.14 38,282.13 Other Liabilities & Provisions 2,692.25 2,150.01 2,137.68 1,193.14 879.30 Capital and Liabilities: 729.51 753.97 0.00 0.00 59
  60. 60. Total Liabilities 80,477.90 72,905.27 68,550.15 56,664.89 40,778.58 Mar '13 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths 12 mths Assets Cash & Balances with RBI Balance with Banks, Money at Call 3,248.92 3,640.15 4,579.80 3,788.26 2,840.44 830.29 675.27 316.67 967.06 0.00 Advances 51,430.79 46,151.41 42,637.85 32,639.11 24,615.35 Investments 22,542.48 20,064.13 18,643.65 17,886.84 12,627.43 Gross Block 844.13 1,007.16 973.75 725.48 555.76 Accumulated Depreciation 0.00 198.78 157.50 186.57 504.87 Net Block 844.13 808.38 816.25 538.91 50.89 Capital Work In Progress 0.00 0.00 0.00 0.00 0.00 Other Assets 1,581.30 1,565.93 1,555.92 844.70 Total Assets 80,477.91 72,905.27 68,550.14 56,664.88 40,778.58 644.47 60
  61. 61. Contingent Liabilities 7,578.22 9,396.94 7,268.34 4,994.47 823.11 Bills for collection 433.44 1,925.38 1,903.49 1,544.70 982.10 Book Value (Rs) 173.38 141.73 127.74 131.96 77.42 Profit & Loss account of Punjab ------------------- in Rs. Cr. ------------------& Sind Bank Mar '13 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths 12 mths Interest Earned 7,340.12 6,474.50 4,932.51 3,934.18 3,247.17 Other Income 417.15 424.45 393.17 383.54 Total Income 7,757.27 6,867.50 5,356.96 4,327.35 3,630.71 Interest expended 5,699.10 4,973.44 3,372.06 2,750.23 2,235.31 Employee Cost 773.51 832.43 755.85 529.64 518.86 Selling and Admin Expenses 0.00 212.85 289.05 196.34 82.88 Income 393.00 Expenditure 61
  62. 62. Depreciation 49.69 43.83 27.85 30.68 0.00 Miscellaneous Expenses 895.75 353.67 385.98 311.65 359.25 Preoperative ExpCapitalised 0.00 0.00 0.00 0.00 0.00 Operating Expenses 1,119.32 1,219.64 1,144.00 810.10 750.19 Provisions & Contingencies 599.63 314.73 258.21 210.80 Total Expenses 7,418.05 6,416.22 4,830.79 3,818.54 3,196.30 Mar '13 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths 12 mths Net Profit for the Year 339.22 451.29 526.17 508.80 434.41 Extraordionary Items 0.00 0.00 0.00 0.00 0.00 Profit brought forward 1,422.51 1,172.88 878.85 597.09 382.73 Total 1,761.73 1,624.17 1,405.02 1,105.89 817.14 Preference Dividend 16.44 19.00 13.50 12.74 2.74 Equity Dividend 68.08 46.84 44.61 0.00 0.00 Corporate Dividend Tax 14.36 10.46 9.65 2.17 0.46 223.14 Per share data (annualised) 62
  63. 63. Earning Per Share (Rs) 12.71 18.46 22.98 27.10 23.58 Equity Dividend (%) 26.80 20.00 20.00 0.00 0.00 Book Value (Rs) 173.38 141.73 127.74 131.96 77.42 Transfer to Statutory Reserves 119.77 125.36 163.33 212.17 234.05 Transfer to Other Reserves 0.00 0.00 1.06 -0.04 -0.02 98.88 76.30 67.76 14.91 3.20 Appropriations Proposed Dividend/Transfer to Govt Balance c/f to Balance Sheet 1,543.08 1,422.51 1,172.88 878.85 579.91 Total 1,761.73 1,624.17 1,405.03 1,105.89 817.14 63